Sunday, June 02, 2013

President vs Unemployment: what are his chances?

My note for

Can the next Iranian administration solve the economic issues facing the country? Its options might be limited. However the public expects the next president to deal with issues such as unemployment and inflation. The fact is that the next administration's actions might pay off in the long run and not in the immediate future. Its options are limited by the economic realities and their efficiency might be reduced in the political process.

Eight presidential hopefuls are permitted to seek the office of president of Islamic Republic of Iran. Listening to them it seems all eight use the same keywords when it comes to the economy: reducing inflation, creating jobs, increasing and absorbing investments and promoting domestic production. However reviewing their comments one does not see any specifics about how they would accomplish these. As one observer put it mildly, “candidates have confused economic slogans with economic planning”. And there's not much time even for planning, for Iran’s economy faces daunting challenges and demands quick action. In a recent meeting of Tehran’s Chamber of Commerce Dr. Masoud Nili told a gathering of businessmen and entrepreneurs that if the current situation continues, in three years Iran’s unemployed population would increase to something between 5 and 8 million. The latest official estimate at the time of writing is 2.9 million. Dr Nili singled out unemployment as the most serious challenge for Iran’s economy.

The question is whether the next president could address the increasing unemployment while keeping inflation in check? Any answer should take the following into account: what powers does the office of president hold and what options are palatable given the political and economic realities.

A first challenge arises from the decentralized nature of economic and fiscal decision making. The executive branch prepares the budget and the development plans; however, they need to be approved by the legislative. The legislators, or Members of Majlis, use this opportunity to seek political patronage and to reward their support base using the process. The outcome will be a policy package of compromises done to gain the necessary political support. The new president faces an uphill battle: he has to implement the required policies without too much compromise in the political process that would dilute those policies.

Addicted to subsidies

Another major challenge is the public opinion. Many Iranians, habituated by decades of central planning, hold the government - and only the government - responsible for energy, public utility, health services and economic infrastructure. If the next government’s solutions for unemployment and inflation affect its ability to provide subsidized services, or reduce the resources available to public services, it will certainly face widespread discontent. The public may not appreciate the tradeoffs required for addressing the economic issues left to the new president by his predecessor. If he tries, on the other hand, to keep the public happy at all costs, his government’s ability to address the economic problems will decline rapidly.

If the next administration wants to solve the problem of unemployment, it needs to eliminate the sources of economic volatility. It definitely has to do this without compromising on programs such as monthly cash subsidies to Iranian households. This means spending money without increasing the money supply. However with the oil revenues declining because of the sanctions and Iran’s limited ability to use these revenues in the global market, the government either needs to adjust the price of energy and eliminate the multi exchange rate system or to borrow money from the Central Bank. The latter will increase the money supply, which will increase the inflation. The former will be resisted because many suspect it causes inflation, even though it will create a more stable economy in which jobs can be created.

The problem is that the process of creating jobs is not a fast one. Dr. Nili estimates that any economic effort to create jobs would take three years to pay off. In these three years Iranians should shoulder increasing prices for gas and imported goods. Public pressure against those policies will mount.

Resource reallocation might be another source of public dissatisfaction when it comes to fighting unemployment. If the next president decides to give higher priority to employment, then it may need to allocate more resources to industries and the development of the private sector. This could mean shifting some of the existing resources from higher education and other public sectors. He will thus have the unhappy task of explaining to Iranians that having more of everything is not an option. Still this could be a great opportunity to implement some lasting reforms by expanding the private sector and improving the efficiency of the public sector.

Of course, many would think that lifting the sanctions would solve Iran’s economic woes overnight. This perception is wrong however. Iran’s economic challenges are no doubt caused in part by sanctions; the government would have more resources to deal with these issues where the sanctions to be lifted; yet lifting the sanctions alone will not be enough.

The next administration is expected to deal with the economic challenges using a limited set of policy tools; it can also make a difference by increasing the efficiency of public sector and improving on accountability and management standards. That will be a tough job, but it is a doable one. Despite significant challenges both due to the bureaucratic process and the public opinion the next government can start an economic reform process which will pay dividends in the long run.

1 comment:

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